IndiGo’s fleet planning – the missing 30

IndiGo is not expanding as rapidly as it was in the past. Its recent network additions were either frequency adjustments or additional flying during the early morning or late night hours.

There have been a lot of questions on why IndiGo is not expanding at the rate at which it did in the past. The speculations have been extreme from cash crunch to shortage of pilots. While the real reason would be known only to the airline, here is my take summarized as the missing 30 and why it made sense to IndiGo to not expand right now.

Flashback

Analysts who have been tracking IndiGo and Airbus were well aware that the 250 A320 NEO (New Engine Option) order by IndiGo was only a MoU. Airbus had not shown that as part of its order list which it publishes every month. However some analysts and media was surprised to know this when the airline filed Draft Red Hearing Prospectus (DHRP) with SEBI. The airline has now firmed up the order with deliveries expected to start in 2018.

The airline placed an order for 100 Airbus A320 aircraft in June 2005 at Paris Air Show. A little known entity backed by an IT company placing one of the largest order in the history of this country had certainly raised eye brows. The last aircraft of this order was delivered in 2014.

In January 2011 when the airline had an active fleet of 34 aircraft, the airline placed another order of 180 aircraft with European aircraft maker Airbus. The airline flew to 24 destinations and had 221 daily flights while placing the order. Today it flies to 38 destinations and has 647 daily flights. The 180 aircraft order would make IndiGo the launch customer for A320NEO and 150 of these aircraft would be the A320NEO while the remaining 30 would be the A320CEO (Current Engine Option) which would be continuation of its existing fleet.

In October 2014 the airline signed MoU with Airbus for another 250 Airbus A320 NEO aircraft. This was the order which was under discussion post DRHP and the airline signed on Independence Day this year confirming it.

The missing 30 and why it made sense

IndiGo has been known for a very systematic induction of aircraft over a period of time. The fleet planning has been good because it inducted more than one aircraft just before the start of winter season or summer season for a smoother induction. The airline took delivery of 6 aircraft between October to December of 2010, and 5 in February and March of 2011. The trend continued with 7 aircraft in February and March in 2012 and 5 in February-March 2013.

But why did the airline convert 30 A320 CEO to NEO and went slow on expansion?

The airline has steadily taken deliveries which peaked to 19 aircraft in 2012. This was also the year when its first set of aircraft were to complete 6 years in fleet – the age at which it returned the plane to the lessors to avoid incurring cost on costly “D” checks. Thus while the airline inducted 19 aircraft in 2012, it returned five aircraft with a net addition of 14 aircraft.

The order of 30 A320CEO as part of the 180 aircraft order was to be inducted between December 2014 – when the last aircraft of the initial order of 100 A320s would be delivered and December 2015 when the first A320 NEO was initially expected to be delivered (It is anticipated that the NEOs would be delivered in January 2016).

Sometime in late 2013 or early 2014, IndiGo shifted the 30 CEOs to NEOs. While Airbus had earlier denied that any of the existing orders could be shifted, the nitty-gritty seemed to have been worked out for a large customer like IndiGo. These 30 would have meant a net addition of roughly 17 aircraft and would have led to re-delivery of 13 which were inducted in late 2008, 2009 and early 2010.

As the induction date for NEO came closer, the margins which an airline gets in Sale & Lease Back (SLB) started becoming narrower. This is because the lessors expect the A320CEO to have little demand few years down the line and would not want to pay a premium to have the A320CEO with them for a long time.

This shortfall of aircraft was fulfilled by taking 13 older aircraft primarily from Tiger Air with a lease period of three to four years, much shorter than the standard six years arrangement which IndiGo had with its lessors for the previous aircraft it took directly from Airbus.

Tiger Air acknowledged that the lease rentals which it would get will be substantially lower than what it pays to the lessors indicating that IndiGo struck a very good deal with Tiger Air.

With this masterstroke, the airline has ensured it has 30 more A320NEOs on order – which helps increase valuation before its IPO and not settle for lower margins in SLB or end up paying for SLB or the aircraft itself and be stuck with an older plane for 6 years with an overlap of 5 years with the NEO.

By leasing from Tiger Air, the airline ensured that the lease period if short and the outgo of rentals is much lesser than a normal lease rental. The marginal hit is the expansion being not as fast as what it would have imagined which the airline will more than compensate when the NEOs start arriving in early 2016 – just 4 months from now.

Lost opportunity for competition?

While IndiGo shifted plans and slowed down expansion, this was a golden opportunity for newer players or existing ones to expand rapidly. With Spicejet still struggling and GoAir waiting for the A320NEOs (The airline has 72 on order), it was probably a golden period for Air Asia India which it seemed to have missed. The chances of having their network mirrored by IndiGo were the least during the last four months due to lack of capacity with IndiGo.

Few Questions on Launch Customer

When the airline signed the deal with Airbus for the 180 Airbus A320 aircraft, both the airline and the manufacturer had mentioned that IndiGo will be the launch customer. However there has been some confusion with even Qatar Airways claiming that it is the launch customer of A320NEO. While the press release from 2011 confirms IndiGo as the launch customer, the press release from Airbus when the first NEO took to the skies mentions Qatar as the launch customer.

Where will these aircraft be deployed in India? Some reports claim that IndiGo will take delivery of these 250 aircraft beginning 2018. The airline now has 430 aircraft on order. The 13 aircraft which came from Tiger Air would leave the fleet starting 2018 – exactly the time when the 250 aircraft order delivery starts. Ten aircraft inducted in 2010, 14 in 2011, 19 in 2012, 17 in 2013 and 16 in 2014 would be up for replacement from 2016 to 2020. That is a total of 66 aircraft and counting the existing 13 which could have seen re-delivery it totals 79, which means one hundred aircraft could be the net addition.

While the airline has repeatedly denied launching subsidiaries or getting into leasing business and saying that India is too large a market to ignore, I keep wondering if IndiGo will launch a subsidiary in ASEAN.

This could largely be driven by how economies perform in Thailand, Malaysia & Singapore. Other areas could well be Indonesia or Sri Lanka.

Will IndiGo take the battle which Air Asia started in India reach Air Asias home base Malaysia, today it is anybody’s guess but we would know in 2018!

3 thoughts on “IndiGo’s fleet planning – the missing 30”

International expansion has be a bigger question for me. Logically it can serve all the international destinations that Jet airways serve with a Boeing 737-800. Bangkok, Kuala Lumpur, Singapore, Kabul, Tashkent, Astana, Colombo, Doha, Sharjah, Dhaka, Chengdu from Hubs in Delhi and Mumbai are the possible areas of expansion.
In the domestic sector they are non existent in Veer Savarkar International Airport. It must have grip over key markets in Pune which are controlled by Jet airways.

I also believe IndiGo will use the additional aircraft (those not used for domestic expansion) to extend their network to more international cities in the region. Starting a subsidiary in any of the countries mentioned in the article does not sound very wise as those markets already now have LCC overcapacity and cut-throat competition.

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